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Hedge Fund Uses CDO Magic to Transform Fannie Mae Junk Debt

  • Bayview borrows against Fannie Mae, Freddie Mac CRT notes
  • Asset-backed deal could be duplicated by other managers
Updated on

A Florida hedge fund transformed risky Fannie Mae and Freddie Mac debt into investment-grade securities, and it could end up helping the mortgage giants’ efforts to offload more of their risk.

Bayview Financial packaged junk-rated securities issued by the two government-backed companies into $118 million of new bonds last month that Fitch Ratings stamped with grades as high as A-. The sale allows the hedge fund to borrow against its investments in the mortgage debt, giving it fresh funds to buy more assets to boost its returns. If other investors can do the same, it may increase demand for Fannie and Freddie’s riskier mortgage bonds, said Burt Weiss, a money manager at Semper Capital Management.